CASE 2: (Activity-Based Costing) Harvey Ltd. Produces three products: Fridges, Dishwashers and Washing Machines. The company uses a single plant-wide factory overhead rate to all three products based on direct labour hours. The company currently uses plant-wide factory overhead allocation based on direct labour hours. The company also adds a 20% mark-up on the cost of production to cover administration cost and gross margin. The selling price per unit for the three products are as follows: Fridge $984.00 Dishwasher $648.00 Washing Machines $808.00 However, the company has noticed that of the three products the Fridges and Dishwashers are high in demand at the set price and are selling fast, but the Washing Machines are not selling even if the quality is quite good. The management is asking you to find out the possible reasons for this. They suspect that there may be something wrong with their costing and pricing. They have heard that Activity Based Costing (ABC) produces more accurate costing and pricing. The company supplies you with the following information: Washing machines $500.00 Material cost (per unit) Labour cost (per units) Fridge $700.00 2.5 hours @40.00/hour Dishwasher $300.00 5 hours @ $40.00/hour @ $50.00/hour 3.0 hours The total budgeted annual production overhead cost of the company is $1 400 000. The company has supplied you detailed information and breakdown about the overhead cost. The company has determined the major activities and cost pools that account for the total overhead cost of the company. These activities, along with their budgeted activity costs, are as follows: Activities Budgeted Activity Cost Basis of allocation to products 1. Machine Set Up 2. Production Order cost $ 428 750 $ 245 000 No of set up used No of production order 3. Inspection and Quality Control $ 183 750 4. Materials Handling $ 367 500 No of moves 5. Indirect Labour $ 175 000 No of inspections Direct labour hours Total: $ 1 400 000 Harvey Ltd has estimated the following activity-base usage and units produced for each of its three products: Products No. of units Setups No. of No. of No of Production Inspections materials orders No. of Direct Labour Hours moves. Fridge 10 000 80 80 35 320 25 000 Dishwasher 2000 40 40 40 Washing machine 50 000 5 Total 55 40 40 400 10 000 0 30 140 000 62.000 125 125 75 750 175 000 Required: 1. Using the single plant-wide factory overhead rate method determine the applied factory overhead cost per unit for the Fridge, Dishwasher and Washing machines. 2. Calculate the total unit cost of production for each product using the material and labour cost information provided to you and the overhead cost you have calculated in 1 (above). 3. Determine the factory overhead cost and total cost of production per unit for the Fridge, Dishwasher and Washing machines using the Activity Based Costing. 4. What should be the correct prices of each product according to ABC costing? 5. Explain to the management of Harvey Ltd. why the Fridge and Dishwashers were selling fast and the Washing Machines were not selling at the existing prices.